When Joel Seligman was selected to be president of the University of Rochester almost a decade ago, the job came with a mandate: UR's endowment "urgently needs to grow."

Rochester Institute of Technology President Bill Destler also took aim at growing the college's endowment, saying six months after he took office in 2007 that he wanted RIT's endowment — around $600 million at the time — to increase to as much as $2 billion. But then the recession sank in.

UR's endowment, which had risen to $1.75 billion in 2008, plummeted to $1.37 billion in 2009, while RIT's endowment, which rose to $671.5 million in fiscal 2008, headed south, dropping $141 million in a year. The two schools' endowments dwarf those of any of the region's other colleges.

In the years since, both colleges have seen their endowments rebound to pre-recession levels. UR solidified its position — centered around its Medical Center — as the top employer in the region; RIT's enrollment surpassed 18,000.

But with public funds for research harder to come by in recent years and colleges under pressure to slow down tuition increases, endowments are as important as ever. And while the robust endowments at Rochester's two big private colleges suggest the institutions are financially prepared for the future, how they're investing and spending those resources isn't as easy to untangle.

Endowments, critical to the financial health of private colleges, consist of money donated over the years and targeted at securing the fiscal future. The money given by donors is often for a specific purpose: Endowments should not, as one financial expert put it, be seen as "a bag of goodies." It's the earnings from the invested donations that are typically spent by a college, not the principal.

But how colleges grow their endowments has changed. The days of college endowments basing their investments on a conservative portfolio of stocks and bonds that guarantee a modest but dependable flow of revenue seem passe.

Instead, colleges are wheeling and dealing like Wall Street financiers, investing in hedge funds and private firms in hopes of finding fertile ground — to strike it rich, with the push by advocates for socially responsible investment policies given short shrift. The collective value of college endowments, about $100 billion 25 years ago, is approaching $450 billion.

How a college handles an endowment can make a big difference. UR, which once held one of the five largest endowments in the country, mismanaged its investments during the 1970s and 1980s — which meant the loss of tens of millions of dollars in potential annual earnings for UR, compared with what a more traditional investment model would have earned.

Endowments can, as UR puts it, serve as a "legacy to the present" by allowing a college to use earnings from its investments to help balance the books and — from scholarships paid for by endowments — help pay student tuition.

But UR and RIT have in recent years used their endowments sparingly — too sparingly in the eyes of some.

RIT's endowment, on average, supports less than 4 percent of the college's annual budget, while UR's endowment contributes less than 6 percent of UR's annual funding requirements.

Both schools provide big sums of financial aid by giving many students discounts on their tuition. Yet other colleges are dipping more into their endowments to help with financial assistance and day-to-day operations — lessening their dependency on tuition.

This past fiscal year, based on data from 835 schools that have endowments, colleges on average drew upon these funds for 8.8 percent of their operating budgets, according to the new annual survey of the National Association of College and University Business Officers and the Commonfund.

UR, which now has the 44th largest endowment in the nation, finished the last fiscal year at the end of June with an endowment worth $1.7 billion. RIT, which had an endowment worth $669.1 million, has the 123rd largest.

For colleges of UR's size — with endowments over $1 billion — those investments, on average, fund 16.2 percent of the operating budgets.

RIT is in a category of endowment — between $500 million and $1 billion in value — in which colleges, on average, use their endowments for 12.1 percent of their operating budget.

"They may be more tuition-dependent than endowment-dependent," said William F. Jarvis, managing director of the Commondfund Institute.

Push for expansion

UR and RIT officials say that they have navigated their endowments through the tough economic times and are limited on how they can use earnings from the endowments because of strings attached that specify how they must be used.

"We have demonstrated discipline in controlling endowment spending to levels that not only benefit the current generation of faculty and students but that will appropriately preserve assets for future generations," said Ronald Paprocki, who is UR's senior vice president for administration and finance.

James Watters, RIT's senior vice president and treasurer, said: "Our spending policy is in line with most university policies."

But others say that college officials can dig deeper into their endowments and do more to encourage donors to address student needs.

The issue of endowment spending was raised by Sen. Charles Grassley, R-Iowa, who said that since nonprofit colleges are tax exempt, they should spend a specified amount of their endowments each year. "Tax-exempt entities are given special status in exchange for performing good works. A minimum payout requirement would help them keep their end of the bargain," said Grassley in a 2010 memorandum.

"They are not passive actors in who they get money from, how it's invested and what's spent," added Michael Dannenberg, director of higher education policy and research for The Education Trust, a nonprofit group based in Washington, D.C., that helps promote college accessibility and affordability.

David Bergeron, who served in the U.S Department of Education for 34 years before leaving his position last March as a top official, said that endowments did not enter into the Obama administration's discussion of how to contain costs.

"There is no law written by Congress that would allow the executive branch to do anything about endowments," said Bergeron, who is now a vice president of the Center for American Progress, a nonprofit public policy group.

Bergeron said that one thing a college can do is try to negotiate with the donor so that the college has more flexibility in how the gift is used.

As it is, UR has greater expectations that its endowment will help make up for a loss of research dollars.

Largely because of the federal budget crunch, UR's research dollars dropped by about $140 million over the past three years —from $460.5 million in fiscal 2010 to $320.6 million this past fiscal year.

"As real dollar support for sponsored research has declined, the School of Medicine and Dentistry increasingly must rely on its endowment," says UR's five-year Strategic Plan, adopted last October.

Endowment uses

RIT now only puts funds designated for a specific use into its endowment. That amounted to $4.4 million last fiscal year. RIT's endowment paid out $25.7 million in scholarships, faculty support and new programs.

Part of the problem is that RIT's endowment was late in developing — dating back to the early 1970s in its current form.

"RIT's endowment is low for a school of its size," wrote Dane R. Gordon in his 2007 history of the school. Nine percent of RIT's alumni donate to the college, but the pool of alumni — now at 114,000 — is growing.

And while a portion of the $25.7 million paid out from the endowment last year went to student scholarships, RIT last school year spent a total of $144.5 million on student aid because of financial aid given as discounts in tuition.

UR does much the same — making extensive use of tuition discounts to supplement scholarships generated by the endowment money.

Such a policy tends to result in some students paying the full price or close to it, while others pay much less. Relying more on scholarship money from the endowment to help pay the tuition for those in economic need would help make college more affordable for all.

The $26.4 million in endowment scholarship money spent by UR last fiscal year does not reach a lot of students. That's because 61 percent of UR's endowment is for the School of Medicine and Dentistry and the Eastman School of Music. Donors designated their funds for such purposes.

Making greater use of the endowment for scholarship money to help the entire student body would lessen a college's dependency on tuition to balance its budget.

Added to the mix is The Meliora Challenge, which is the largest fundraising campaign in UR history. To date, the campaign has raised more than $1 billion of its $1.2 billion goal.

A total of $175 million raised — some earmarked for the endowment — is going for student support, said Paprocki.

How UR manages its endowment is a mystery to the general public, though general information about the endowment is online. Douglas W. Phillips, senior vice president who oversees the endowment, is responsible to UR's board of trustees and an Investment Committee.

In responding to written questions posed by the Democrat and Chronicle, UR would not address such topics as the role outside advisers play in the endowment and what would be grounds for prohibiting an investment. Instead, UR said: "This information is not available in the public domain."

Lessons of history

UR's endowment, which goes back to a $10,000 donation given in 1849 to help establish the college, got a big boost from George Eastman, who over the years gave $51 million to UR. That helped to make UR's endowment one of the largest among colleges following World War II.

But UR learned the hard way that risky investments can be costly.

UR, which emerged as having the fourth largest endowment among private colleges, blundered in its investment portfolio during the 1970s and 1980s, says a 1993 study co-authored by Gregg Jarrell, who teaches at UR's Simon Business School and Frank Dorkey, who was then a guest lecturer at the school.

"We conclude that Rochester broke the three cardinal rules of portfolio management," says their report about the need to diversify investments, avoid investments that can't be easily sold and make detailed disclosures of fees and investments.

During the 1980s, UR put almost all its endowment in small, high-tech, growth companies, which the report called a risky strategy that failed.

Had UR stuck to a more traditional portfolio, says the study, UR's endowment would have been worth $1.48 billion in 1992 instead of $620 million — and could have generated $60 million to $90 million more a year in earnings.

In recent years, UR and RIT have followed the national trend of putting a greater percentage of their portfolios into what are called "alternative investments," which can bring bigger returns but can put colleges in a more precarious position.

They consist of such investments as hedge funds and private equity, investments that typically require much less disclosure and are not easily sold, particularly during a financial crisis.

In 2002, about 70 percent of UR's portfolio was in stocks and bonds, with 30 percent in alternatives, according to Rochester Review magazine. UR now has a target of putting 56 percent of its investments in alternatives.

"The key is diversification," said Paprocki about UR's strategy.

RIT has also shifted toward alternative investments. Hedge funds, for example, made up 23.4 percent of RIT's investment portfolio last fiscal year — more than double the 10.1 percent figure from eight years earlier.

Watters also spoke of the importance of diversifying and said that non-public disclosure of returns does not necessarily mean that hedge funds are less accountable. He stressed the need for a strategy that looks beyond a single year's performance, which this past year saw stocks doing much better than alternative investments for endowments.

But critics such as Josh Humphreys, who has studied the history of philanthropy, worries that too much emphasis is being put on risky investments that move colleges away from their educational mission.

"It took the fiscal crisis for many of those responsible for these strategies to take a fuller measure of risk they were taking," said a 2010 report by the Boston-based Tellus Institute. Humphreys was the chief author.

Endowments and responsibility

Another factor in the endowment equation is socially responsible investments, which in its most recent form has found expression in such causes as having colleges divest from fossil fuel stocks.

"It's socially responsible for colleges and universities to look at their mission and examine their investments," said Dan Apfel, a UR graduate who is executive director of the Responsible Endowments Coalition.

Although UR has a social investment policy and in 2006 decided not to invest in companies that supported the Sudanese government because of its genocidal policies in Darfur, Apfel said that UR has not taken many steps since then in a socially responsible direction.

Here, too, UR learned the hard way the consequence of ignoring social responsibility.

In 1987, UR drew national attention — including protests by UR students — for reinvesting in companies doing business in South Africa at precisely the moment most schools were divesting to pressure the Apartheid regime. UR eventually reversed this decision.

UR said that decisions on proxy votes concerning practices and policies of companies its endowment holds stock in are made by investment advisory firms "unless action is requested under the social investment policy."

RIT, which has put a priority on sustainability, has invested in making the college more energy-efficient and has helped launch green technology companies.

But last school year, RIT student Daniil Pikulik failed to get RIT to take the next step of divesting in fossil fuel stocks.

"Because it is unconscionable to pay for our education with investments that will condemn the planet to climate disaster, we call on RIT to immediately freeze any new investment in fossil-fuel companies," wrote Pikulik in a letter to Destler. He also collected about 50 names to a petition calling for this much.

Watters responded that RIT trustees have "stewardship of the university's financial assets," and that he did not believe that Pikulik's divestiture strategy would be adopted.

In answering questions posed by the Democrat and Chronicle, Watters said that RIT has directed the managers of its funds to consider the college's "stance on social and environmental factors" when voting on resolutions for stocks RIT owns.

But when asked about RIT's position on divesting from fossil fuel companies, Watters said, "The trustees are responsible for achieving the best investment return possible within an appropriate and prudent level of risk assumption."